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Cabela's (NYSE:CAB)

Q1 2012 Earnings Call

April 26, 2012 11:00 am ET

Executives

Chris Gay - Director of Treasury & Investor Relations and Treasurer

Thomas L. Millner - Chief Executive Officer, President and Director

Ralph W. Castner - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Chairman of World's Foremost Bank

Analysts

Reed Alan Anderson - Northland Securities Inc., Research Division

Joe Edelstein - Stephens Inc., Research Division

Matthew R. Nemer - Wells Fargo Securities, LLC, Research Division

David G. Magee - SunTrust Robinson Humphrey, Inc., Research Division

Jared W. Madlin - Piper Jaffray Companies, Research Division

Aaron Goldstein - JP Morgan Chase & Co, Research Division

Jonathon N. Grassi - Longbow Research LLC

Lee J. Giordano - Imperial Capital, LLC, Research Division

Jim Duffy - Stifel, Nicolaus & Co., Inc., Research Division

Seth Sigman - Crédit Suisse AG, Research Division

Mark E. Smith - Feltl and Company, Inc., Research Division

Unknown Analyst

Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the Cabela's Incorporated First Quarter Fiscal 2012 Earnings Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded. I will now turn the conference over to Mr. Chris Gay, Director of Treasury and Investor Relations. Please go ahead, sir.

Chris Gay

Good morning. I welcome everyone listening today, both on the conference call and by webcast. A replay of today's call will be archived on our website at www.cabelas.com. With me on today's call are Tommy Millner, Cabela's Chief Executive Officer; and Ralph Castner, Cabela's Executive Vice President and Chief Financial Officer.

This conference call will include forward-looking statements. These statements are made on the basis of our views and assumptions as of this time, and are not guarantees of future performance. Actual events or results may differ materially from those statements.

For information about certain factors that could cause such differences, investors should consult our annual report on Form 10-K and quarterly reports on Form 10-Q filed with the Securities and Exchange Commission and available on our website, including the information set forth under the captions Risk Factors and Special Note Regarding Forward-Looking Statements.

Additionally, this conference call may include certain non-GAAP financial measures. Please refer to our website to find reconciliations of these non-GAAP financial measures to GAAP.

Now I will turn the call over to Tommy Millner, Cabela's Chief Executive Officer.

Thomas L. Millner

Thank you, Chris, and good morning, everyone. Our record first quarter financial results validate that our growth strategy is working and working well.

For the quarter, we realized strong growth in comparable store sales, merchandise margin, Retail and Direct segment operating margin, improved performance at our Cabela's CLUB Visa program and increases in market share. This strong performance led a record first quarter earnings and further increases in return on invested capital.

We are particularly pleased with continued strength in comparable store sales, which increased 4.2% in the quarter. This is on top of an 8.9% comp store sales increase we realized in last year's first quarter. These strong results are mostly due to our store Outfitters, providing outstanding service to our customers.

Over time, we've invested significant resources in additional training and enhanced tools to ensure our Outfitters have everything they need to provide extraordinary service to our customers. And the results speak for themselves. For the quarter, average ticket increased roughly 5%.

In addition to comparable store sales, we are also very pleased with our merchandise gross margin performance in the quarter, which is one of our key initiatives. For the quarter, merchandise gross margin increased 150 basis points to 34.5%. This is the highest first quarter merchandise margin in the last 3 years. Similar to last quarter, we continued to see significant strength in the Firearms and Shooting categories, which caused a material mix shift into these lower margin categories.

For the quarter, this adverse mix resulted in roughly a 60-basis point headwind to merchandise margin. As a result of hard work from our merchants and planners managing inventory levels, we were able to avoid significant end of season markdowns as we transitioned from fall to spring goods during the quarter.

Additionally, with the unusually warm weather, we transitioned to our spring merchandise sets about 45 days early, enabling us to sell new merchandise at full margin.

Now let me turn to retail profitability, which is a key initiative in our retail growth strategy. For the quarter, retail profitability increased 120 basis points to 12.8%, a new first quarter record. This is the 12th consecutive quarter of retail profit contribution improvement. Improvements in retail profitability were due to higher merchandise margin and continued improvements in labor productivity.

Last quarter, we discussed in depth our retail expansion growth strategy. Since that call, we've opened 2 next-generation stores: one in March in Wichita, Kansas; and the other, last week in Tulalip, Washington. Both of these stores had tremendous openings with thousands of passionate Cabela's customers waiting in line to witness the ribbon cutting and shop these very exciting stores. If you have never been to a Cabela's opening, I encourage you to attend. It is truly a unique event. While it is still early, I am delighted to report that both stores have exceeded our expectations, which validates everything we said last quarter with regard to accelerating retail store expansion. As a reminder, we expect to increase retail square footage 10% this year and up to 13% in 2013.

Additionally, earlier this morning, we announced 2 store locations in the Denver market scheduled to open in 2013. Given the number of Cabela's customers and the abundance of outdoor opportunities in the Denver region, we are very excited to enter this market with 2 stores. In addition to these stores for 2013, we have announced plans to open next-generation stores in Louisville, Kentucky, Columbus, Ohio and Grandville, Michigan.

Now let's look at our Direct business. For the quarter, Direct revenue declined 8.3%, which was disappointing as this was down more than we had planned. As we mentioned last quarter, our Direct business got off to a very slow start in January. Due to the unusually warm winter, we saw numerous competitors cut prices dramatically as they liquidated winter inventory. Because of our favorable inventory position coming out of the fourth quarter, we did not have to clear a significant amount of excess inventory. As a result, both gross margin and operating margin improved in the quarter in our Direct segment, with operating margin increasing 70 basis points to 18%.

With regard to revenue, February and March each improved sequentially. Despite the revenue performance, we realized improvements in fill rates and Internet traffic.

Now let's look at operating expenses, which again saw sequential improvement. Operating expenses as a percent of revenue decreased 30 basis points to 36.3% compared to 36.6% in the year-ago quarter. We continue to focus on getting the maximum benefit out of every operating expense dollar while making important investments in our business.

Additionally, due to accelerating store growth, we realized increases in preopening costs. For the quarter, preopening costs were $4 million compared to $2.8 million in the year-ago quarter. For 2012, we expect operating expenses to increase at a slower rate than revenue growth.

Now let's look at our Cabela's CLUB Visa program, which had another exceptional quarter, as we continued to see strong growth in average active accounts, lower funding costs and improvements in delinquencies and net charge-offs. For the quarter, average active accounts increased 7.6%. We also realized significant improvements in net charge-offs, which were just 2% in the quarter and are at the lowest levels we've seen in more than 4 years. With the backdrop of lower funding costs, strong account growth and favorable delinquencies and charge-offs, we are very confident that the Cabela's CLUB Visa program will continue to have a very good year.

Now looking at guidance. It is clear our strategies are working, and our next-generation stores are achieving superior results. Accordingly, we expect to achieve strong full year 2012 results with a meaningful portion of our first quarter over-performance carrying through to our full year bottom line results.

In closing, I want to personally thank all of our Cabela's Outfitters for a great start to 2012. We appreciate all of your hard work and effort in cherishing and delighting our customers each and every day.

Now I'll turn the call over to Ralph Castner to review in more detail, among other things, performance at World's Foremost Bank. Ralph?

Ralph W. Castner

Thanks, Tommy. Following up on Tommy's remarks, we're pleased with our first quarter results and the results we achieved with regard to revenue growth, merchandise margin, operating expenses, net income and return on invested capital.

For the quarter, Financial Services revenue as a percentage of average credit card loans increased 20 basis points to 11.2% compared to 11% in the year-ago quarter. Increases in Financial Services revenue were primarily due to higher interest and fee income and lower interest expense.

For the quarter, net charge-offs as a percentage of average credit card loans improved 74 basis points to 2.0% compared to 2.74% in the first quarter last year. Additionally, we continued to see improvements in delinquencies. Greater than 30-day delinquencies were just 0.8% as compared to 0.95% a year ago. Greater than 60-day delinquencies were 0.49% as compared to 0.59% a year ago, and greater than 90-day delinquencies were 0.26% as compared to 0.30% a year ago.

For the quarter, the license fee the WFB pays the Merchandising business actually decreased $7.7 million from the first quarter a year ago. By channel, it was down $4.3 million in our Direct segment and $3.4 million less in our Retail segment. So the strong profitability that we saw in both of our Retail and Direct segments were there despite having less marketing fees than what we had a year ago.

As a result of the continuation of favorable delinquency and charge-off trends, we reduced our allowance for loan losses by $6.3 million in the quarter. This compares to an $8.1 million reduction in first quarter last year. We do not expect to have material reductions in our allowance for loan losses for the remainder of 2012.

Now let me highlight WFB's future funding plans. In March, we completed a $425-million, 5-year securitization, most of which refinanced notes that matured in the first quarter. The securitization transaction included the issuance of $275 million of notes, which accrued interest at a fixed rate of 1.63% and $150 million of notes which accrued interest at a floating rate equal to 1-month LIBOR plus 53 basis points. Our next term securitization doesn't mature until January of 2015.

Additionally, in the first quarter, we renewed our $225 million variable funding facility with Wells Fargo. The commitment is for 3 years, and the early renewal will allow us to lather the maturities of our variable funding facilities to have only one come due in any given year. Looking forward, we plan to fund future growth with the combination of future term securitizations and by remaining active in the certificate of deposit market.

From an inventory standpoint, inventory decreased 4% or $23 million year-over-year to $539 million. We're very comfortable with current inventory levels and believe we are well positioned for the remainder of 2012.

We ended the quarter with total debt at the parent company of $340 million. Recall that our series 2008 A Senior Notes have annual principal payments of roughly $8.1 million beginning in January 2012 until final maturity in 2018. Accordingly, in January, we made our first required principal payment of $8.1 million, with one of the lowest lease adjusted debt-to-total-capital ratios in the retail industry. We remain very comfortable with our debt levels.

Last quarter, we announced that the Cabela's Board of Directors improved the share repurchase program designed to offset shareholder dilution, resulting from the granting of equity-based compensation awards. We did not purchase any shares in the first quarter.

Now let me turn the call back over to Tommy for some closing comments.

Thomas L. Millner

Thanks, Ralph. We're very pleased with our record financial results for the first quarter and the significant improvements we continue to make in our areas of strategic focus.

With that, operator, let's open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll go first to Reed Anderson with Northland Securities.

Reed Alan Anderson - Northland Securities Inc., Research Division

A couple of questions. First, Tommy, on comps. You gave a little bit of detail in the release. And I was just curious, any more -- any broader thoughts on categories, et cetera? Or should we just infer that, that was kind of the driving core with firearms and fishing. And then secondly, just thoughts early on here. The trend has certainly been better than most people had expected. Are we continuing to see that here in the second quarter?

Thomas L. Millner

Yes. Reed, we were very pleased in our Retail business with the tenor of business in the first quarter. Guns and ammo were certainly strong, but fishing also got off to a good start. So from a comp standpoint, we were very pleased that we drove the business. We would expect April comps to be up low-single digits, so a good start to the second quarter as well.

Reed Alan Anderson - Northland Securities Inc., Research Division

Okay. Good. The -- in terms of your comments about -- in talking about what's driving comps is Outfitters and so forth. I wonder if you might expand on that a little bit and tie into that comment the notion that we're getting even a lot of, sounds like a lot of leverage, at the retail labor level.

Thomas L. Millner

Well, we are getting leverage. But concurrently, as we've talked, we've made significant investments in training for our folks, not just in Retail, but also our call center Outfitters. And that has resulted -- we're working hard on add-on sales, and we've launched the concierge program at our gun counters so that we're not just walking this relatively low margin sale out the door. And that we have people there to assist in the add-on sale of a scope and a gun case and a sling and whatever else they need. So we're working really hard in leveraging our labor not to do tasks, but to do selling.

Ralph W. Castner

Reed, the other area of the company where we've really seen a lot of leverage, just on the pure expense leverage side, has been on our distribution centers. Those guys have just done a really good job of managing their expenses and driving them down as a percent of sales.

Reed Alan Anderson - Northland Securities Inc., Research Division

Okay, that's helpful. A couple of others. On the Direct one, you commented on Direct, Tommy. You talked about -- or you made reference to just competitive liquidation, et cetera, discounting and so you didn't have that excess inventory to do that. Was that more of a factor in Direct versus Retail? I was -- just wanted to be clear on that.

Thomas L. Millner

Yes. Absolutely.

Reed Alan Anderson - Northland Securities Inc., Research Division

Okay. All right. And then...

Thomas L. Millner

And then, Reed, it was encouraging. When February and March unfolded, we saw significant sequential improvement, which has continued into April. We would expect April Direct to be down very low-single digits.

Reed Alan Anderson - Northland Securities Inc., Research Division

Okay, okay, that's helpful. And then Ralph, on the bank and the cards, card growth was nice. I mean, it was a good 7.5%. But I'm still thinking that number is going to rise this year given your retail growth. Do you still believe that? I mean, is that -- do you think that number is going to tick up beyond what we saw in the first quarter or...

Ralph W. Castner

Yes, I think there's going to continue to be upward pressure on card growth. Sort of similarly, Reed, you remember when we slowed down store growth 2 or 3 years ago, everybody thought that would -- that card growth would fall off the cliff, but it didn't. I mean, because our old stores are so productive. But there's no question. If you would have seen the people lined up for credit cards in Tulalip and Wichita, there will be upward pressure on that number. Now it's hundreds of basis points, not -- or maybe 800 basis points. It's not several hundred basis points.

Thomas L. Millner

Reed, another comment on comps. I think what was encouraging to us -- one of the things we don't talk a lot about on calls or at analyst meetings is the significant competitive strength we have in data analytics. And in the first quarter, we saw gas prices rise 10% on top of a 27% increase last year. And what we noticed was that we couldn't draw any correlation to drive times to our stores, which we monitor very carefully. So we couldn't link any changes in drive times to gas prices. So it would not appear that gas prices had a meaningful effect on our business when we posted really nice up comps together with transactions only down 1%, which is, again, a sequential improvement from what we had been seeing.

Reed Alan Anderson - Northland Securities Inc., Research Division

That's terrific detail. It's very helpful in this environment. I've one last question, Ralph, on the bank's side. I think we sometimes get too focused on the granularity in the way you report that. But if you just look at kind of the net Financial Services revenue as a percent of the total, that 11.2% number, is it -- does it make sense if we look year-over-year that you should be up this year versus last year? Like you were up 20 bps in the first quarter. Is that the way to look at that? Or is it because you had the onetime or the benefit from provision that it wouldn't necessarily be up? Just looking at that bottom number.

Ralph W. Castner

Well, I would not expect a meaningful improvement in that as a percentage. As I've sort of communicated before, this business is, on a per account basis, is pretty good. And you touched on it on your first question, Reed, where we should expect the improvement in that business is continued account growth and even to some extent accelerating account growth. One other thing on that, and I highlighted this in my comments, Reed, that just one other important thing with respect to the bank, I mean, everyone has always got so infatuated with this marketing fee that we pay. It was actually down $7.7 million year-over-year and $3.4 million of that was in Retail. So the $10 million improvement that we saw in retail profitability in the quarter was despite getting $3.4 million less from the bank. So I just don't want to read -- anybody to read the press release and think all the improvements related to the bank is half of that improvement you see in the Financial Services profitability is attributable to the less marketing fees than they were a year ago.

Operator

And we'll go next to Rick Nelson with Stephens and Company.

Joe Edelstein - Stephens Inc., Research Division

This is Joe Edelstein for Rick. First question relates to the new stores, the Wichita stores, the Tulalip store in Washington. What kind of success have you seen so far? And do you think that these could actually be a $40-plus-type million revenue generators?

Thomas L. Millner

Well, both grand openings were borderline frightening from the number of people that were lined up at the front door. Sufficient so that in Tulalip, rather than give a long speech, I just said "You probably want me to just shut up and open the door." And there was a round of applause from 7,000 or 8,000 people. So -- and we witnessed the same thing in Wichita. Thousands of people at the front door. The traffic kept coming for days and days. And a couple of you, I think, on the phone were probably at Tulalip and it's really something to see it. So we couldn't be more pleased now 3 weeks later in Wichita and 10 days after a week -- or 10 days after Tulalip, just phenomenal openings.

Ralph W. Castner

To kind of help you quantify that. I mean, you asked your question in a number, but to help you quantify it, I mean those stores should do north. Our chain-wide average is called $325 a foot of revenue. Those should do $400-plus per foot. Now Wichita is only an 80,000 square foot store, so that'll be $32 million. Getting that store to $40 million feels like a stretch. Now we're at 100,000 square feet in Washington, so $40 million feels pretty easy there.

Thomas L. Millner

Yes.

Joe Edelstein - Stephens Inc., Research Division

Okay, great. Just a couple of other questions on margins. In the release, you mentioned that merchandise margins improved in 10 out of the 13 subcategories. I'm just trying to get a sense of what the other 3 and why you didn't see a lift there.

Thomas L. Millner

I don't remember what those 3 were right off the top of my head. But our point was that we just saw broad-based improvements in margins. And it's been the result of what we've talked about for 3 years, an increased focus on vendor collaboration, better in-season management and preseason planning and just better execution across the enterprise. And it also helped us that the way we've managed inventory in the last couple of years definitely helped us by not having an abundance of end of year seasonal closeout merchandise that would have had a negative impact on margin.

Ralph W. Castner

Most of the categories that are down are apparel-weighted categories, but I'll tell you it's just nothing to get excited about. One of the 3 is down 14 basis points. So it's just not a meaningful amount of impact on the total. The point was it's across all sorts of categories.

Thomas L. Millner

And in spite of the headwind of 60 basis points in guns and ammunition, which remain very strong as you can well imagine.

Joe Edelstein - Stephens Inc., Research Division

Yes, that's great color. Maybe just one other question then on margin opportunity. At the Analyst Day, I believe you had talked about a new price optimization tool that would go in later this year. Are you still on track for that? And what kind of progress has been made in determining that SKU-level-type profitabilities?

Thomas L. Millner

Those 2 initiatives are still in place and on track, and we would expect to reap benefit as we go into next year, as I think Brian said at the analyst meeting. So we continue to add tool sets to provide continuous improvement, so that we can improve every aspect of the business, including merchandise margin over time.

Joe Edelstein - Stephens Inc., Research Division

Can you quantify any opportunity at this point? Or you're still just targeting the 200 to 300 basis point improvement in merchandise margins, I guess, adjusting for the firearms mix?

Thomas L. Millner

Absolutely.

Operator

And we'll go next to Matt Nemer with Wells Fargo Securities.

Matthew R. Nemer - Wells Fargo Securities, LLC, Research Division

So I just -- my first question is on the Retail side of the business. Given the transition to spring 45 days early, is there any way to measure? Or do you think that we should be aware of any potential pull forward from the second quarter and the first?

Thomas L. Millner

I don't think so, Matt. And I would make one point. The decision to pull forward was a conscious, basically unplanned decision. When we saw winter not coming back and when weather forecasts didn't indicate that it would, our merchants and planners proactively said, "Well, let's turn lemons into lemonade, if we're not going to have winter persist through March." And so we aggressively pulled our roles early. And what we saw was great reaction to spring merchandise. Women's apparel, fishing, and we've been pleased with how that has continued. So I don't think there was a great deal of pull forward, especially when you look at a category like fishing, which was so weak all the way through the second quarter of last year. And fishing has just been doing very, very well.

Matthew R. Nemer - Wells Fargo Securities, LLC, Research Division

Okay, that's helpful. And then do you ever give any quantification around the firearms and ammunition category in terms of how much that was up in the quarter? I'm trying to gauge how much of the comp was driven by that category.

Thomas L. Millner

No, we don't give individual category components to the comp. But -- and remember, we don't sell guns on the Internet. So guns only affect the Retail channel and they were definitely a help. It was our strongest category in Retail.

Matthew R. Nemer - Wells Fargo Securities, LLC, Research Division

Okay. And then in the Direct business, your operating income was only down about 5% despite revenue being down 8% and obviously, less in the contribution from finance. So just sort of wondering how you accomplish that on the cost side of the Direct business?

Ralph W. Castner

The largest thing was just having the less Direct marketing costs out of the mill is a big piece of it. And gross margin was up big, as you'd expect.

Matthew R. Nemer - Wells Fargo Securities, LLC, Research Division

Is that total circulation or also more on the SIRC side or more in the page count side or a little bit of both?

Ralph W. Castner

Actually neither. It's been better negotiating the pricing.

Thomas L. Millner

SIRC was only down 3% in the quarter.

Matthew R. Nemer - Wells Fargo Securities, LLC, Research Division

Okay. And then lastly, you announced 2 stores in Colorado this morning that are about 30 miles from each other, and -- which I think is a little closer than you typically would locate stores. So just wondering if you can talk about the decision to put these stores so close to each other and why not make one of them an Outpost store?

Thomas L. Millner

Well, that's a great question. We feel that it's a very important data point for us to have to understand the impact of going to a large metropolitan market like Denver, with more than just one store. And I would submit to you that the store in South Denver is about 2 miles south of Park Meadows, for those of you that know it. So that store's going to pick up Northern Colorado Springs business and also South Denver business. Thornton, while it's only 30, 35 miles north, we'll be more of a Northern Colorado store that will pull from -- Fort Collins, probably Cheyenne, Longmont and Loveland. So you should interpret that we are sufficiently confident in how our next-gen stores are functioning and launching that we felt comfortable. Let's see what happens in 2 stores in 1 market opening on the same day. And we think, when we look at traffic patterns, it competitively helps us a lot, vis-à-vis, where competition is located.

Operator

And we'll go next to David Magee with SunTrust Robinson Humphrey.

David G. Magee - SunTrust Robinson Humphrey, Inc., Research Division

I guess related to the last question. Aren't your stores -- looking at the store in Dallas that's pretty close to another store as well that does -- that doesn't have any cannibalization?

Thomas L. Millner

Yes, we do. And that actually gave us increased confidence as we went into Denver. There were a couple of data points. That was the most meaningful one was the Allen, Texas and Fort Worth. We just didn't see a meaningful change in sales in Fort Worth when we opened Allen at all. I'll tell you, based upon the 1 or 2 weeks since we opened Tulalip, we have seen sort of similar performance at our Lacey store. So as we go with these smaller stores, we've just had increased confidence that we can put more in one market which sort of led us to the decision we did in Denver.

David G. Magee - SunTrust Robinson Humphrey, Inc., Research Division

You mentioned that the sale per foot differential being very favorable. Just sort of looking at the trends with mix and what you pay in the rent and the credit cards and things like that, are you feeling sort of equally good about the profit per store that you'll generate?

Thomas L. Millner

Yes. And in fact, David, we don't talk a lot about Canada on the calls. But our store in Edmonton is performing at very, very high levels also, in line with what we saw at Wichita and Tulalip and Grand Junction and Billings. So the store in Edmonton just continues to roll.

David G. Magee - SunTrust Robinson Humphrey, Inc., Research Division

And then lastly, with regards to the Direct business, it sounds like to me that was sort of a onetime deal in January. Given the sort of you have your initiatives to try to generate better top line there, but at the same time you do cannibalize by opening stores, what's sort of a reasonable expectation of the balance of the year for the Direct? Is this low-single digits? Is that what we should factor in?

Thomas L. Millner

Yes, I would think so. Low- to mid-single digits. We've said over the last couple of calls that the Direct business has been struggling for about 5 years. So we're not going to fix it in 6 months. But I think we're confident that the things that we're working on, which is improvements in site navigation, better digital tools, a more robust mobile offering. I think we've got 1,600,000 or 1,700,000 friends on Facebook, so we're using social media a lot more aggressively. We would hope to see sequential improvement over the next couple of years in the Direct business.

Operator

And we'll go next to Sean Naughton with Piper Jaffray.

Jared W. Madlin - Piper Jaffray Companies, Research Division

This is actually Jared Madlin dialing in for Sean this morning. I guess just digging a little bit further into the weather here. With the warm weather in categories, specifically like fishing or maybe camping, I know you mentioned you don't see pull forward being an issue. But so -- does the warm weather just lift the whole category? Or should we expect some category-specific areas to be a little bit impacted by the warm weather?

Thomas L. Millner

Well, I mean, warm weather definitely impacts and dry warm weather impacts rainwear negatively. But in Retail, we would see -- in Direct, we see fishing improved and power sports better as people can get out in the lakes and recreate. So I think it's pretty much common sense the categories you would think would be affected by warm weather are, and the negative ones they're impacted as well. But on balance, we can't control the weather. We just have to do the best and manage around it, which I think we did in the quarter.

Jared W. Madlin - Piper Jaffray Companies, Research Division

Okay. And just quickly with -- any timing shift with marketing events in the quarter for Q2 and Q3? Any shift there?

Thomas L. Millner

No. Not significant.

Jared W. Madlin - Piper Jaffray Companies, Research Division

Okay. And do you expect any leverage on marketing expense going forward this year?

Ralph W. Castner

Well, we certainly had some in the first quarter. And yes, I would expect some to continue. I'd also expect our absolute level of marketing spend increase as we go throughout the year, particularly in our Direct business.

Thomas L. Millner

But we would expect to leverage total expenses over the year.

Operator

And we'll go next to Aaron Goldstein with JPMorgan.

Aaron Goldstein - JP Morgan Chase & Co, Research Division

First, can you really talk about what's driving the ticket growth?

Thomas L. Millner

Yes. We're -- I mean, we're working on significant initiatives in add-on sales. If you had been at our Tulalip opening, you would've seen more clip strips throughout the store by orders of magnitude to try and encourage customers to add to cart. And that's helping us a lot. And I think we've really just scratched the surface there. I'll give you an example because you live in the Northeast, Aaron. There is an explosion in the bug populations in the Northeast. So we are aggressively, in our stores in the Northeast, having clipper strips everywhere for tick repellants and mosquito repellants. And those are -- that's just one example of many where we're trying to encourage the customer, I think successfully, to add to cart in addition to the concierge program at the firearms counter because we sell a lot of guns every year. And if we can just get every customer to add a scope or a gun case or a sling or mounts or bases, it's a -- or a cleaning kit, it significantly impacts ticket.

Aaron Goldstein - JP Morgan Chase & Co, Research Division

So this quarter, the ticket growth was more basket driven, not so much price?

Thomas L. Millner

Yes, I would say that's fair.

Aaron Goldstein - JP Morgan Chase & Co, Research Division

Okay. And then going back to the question on the Direct segment fixed cost. How sustainable is the cut margin fees? I guess what I'm trying to ask is when is there going to be more significant leverage potentially if Direct revenues continue to decline at these rates?

Ralph W. Castner

Well, I'm not sure I appreciate your question. But most -- at least over time, virtually all of the cost in Direct business are variable. The biggest component in the expense space is catalog and Direct marketing costs. I mean, the rest of it isn't meaningful. Now having said that, we're not content with the decline that was seen in the Direct business, and we'd, as Tommy said, love to get that either to a smaller growth or a small gain. But over long periods of time, this -- Direct marketing costs run about 15% of sales and that's on total SG&A of about 20% or 22%. So -- and the rest of them -- a big piece of the rest is call centers, which are also variable. So there's not a real fixed cost base in the Direct business.

Thomas L. Millner

And we don't view, just to be clear, a down 8% as any kind of success measure.

Aaron Goldstein - JP Morgan Chase & Co, Research Division

Yes. I was just saying because margins continue to be quite strong in that category. I'm just seeing if there's potential. Switching over...

Thomas L. Millner

We don't have any drain in the Direct business from the boom in gun sales.

Aaron Goldstein - JP Morgan Chase & Co, Research Division

Yes. And then switching over to guns and ammo, extremely very strong for you. How are the shortages sequentially on the supply side? I know you're getting better allocations, but are those still pretty constrained?

Thomas L. Millner

Supply is tight, but we're getting enough to keep us in stock and keep us doing business. After the boom in 2008, when I got here in '09, we diversified our supply base pretty significantly on a global basis in ammunition to make sure that we were covered from a supply side much better than we had been when the market took off in '08. And so that, together with the strength of our balance sheet, and if necessary, paying very rapidly for goods, which we've not had to do yet, I think puts us in a very good position. We are also a preferred vendor on both the long gun side and the hand gun side and would expect good deliveries there.

Aaron Goldstein - JP Morgan Chase & Co, Research Division

And then lastly, on the bank side, on the charge-off provisions. You talked about historical rates being in the 2% to 2.5%. When you're looking at your provisions, is that what would currently -- if you currently unwound at the current rate, that's what the charge-offs you would need? Or is it is -- or is there a buffer in there for kind of what the average historical rate that you think it's going to be?

Ralph W. Castner

Well, I'm not sure I understand your question. When we calculate the allowance, we use the existing delinquencies and that's in correlation to a charge-off level that we expect to see. So as we go forward, what's going to happen with the allowance, we've -- over the last 2 or 3 years, we've had the benefit of dramatically lower charge-offs and delinquencies. Sometime very soon, that's going to start to get mitigated because of growth in the portfolio. So we're going to need a bigger allowance just because the portfolio is growing. And at least I feel like -- as I sit here today, I feel like we're near -- pretty close to that starting to cross. In other words, the growth of the portfolio is going to require a bigger and bigger allowance, which will offset any benefit we get from continued improvements in the macro credit environment.

Aaron Goldstein - JP Morgan Chase & Co, Research Division

And do you think structurally charge-off rates are just lower because you're signing up better quality customers so that historical rate...

Ralph W. Castner

No, not necessarily. I think what's happening is we're just -- we've worked all of the unemployed and worked out on the portfolio. We're getting very low rates now. Just accelerating growth does help with the charge-offs as a percent because new accounts generally don't go bad. So you could see a further decline in the charge-off rate. But I would view anything below 2% as not sustainable.

Operator

And we'll go next to Jonathon Grassi with Longbow Research.

Jonathon N. Grassi - Longbow Research LLC

Why do you guys think the Direct business was so significantly impacted because of the winter-related clearance, but the Retail was not? Or -- I mean, was the Retail impacted in January and then improved significantly in March -- in February and March? I guess maybe can you give us an idea what Retail's comps were over the quarter, by month?

Thomas L. Millner

Well, we don't give comps by quarter. But let me go to the Direct issue. If you go back a year ago, we would have had to clear significant amounts of end of season winter merchandise in the month of January. And when we came in this year, as we told you guys on the year-end call, inventories were down. We were in very good shape because of our vendor collaboration initiatives. So here we come into January and we literally just didn't have all of that merchandise to sell. So it created a pretty significant grow over problem. And luckily, margin lift was there. It's a tough result in January from a sales standpoint, but it certainly was the result of good management of inventories and good vendor collaboration. So put that against the macro environment where virtually all of our competitors are drastically reducing prices with free shipping, 40% off, everything you can imagine to clear inventories that they didn't clear at year end. So that was really the story. And once we got through the January challenge, we saw pretty significant sequential improvements as we got into February, March which carried into April. And on the Retail side, to your point, we've got guns that are just helping an awful lot in the month of January year-over-year strength.

Jonathon N. Grassi - Longbow Research LLC

Okay. All right. And then I think you said your expected comps in April look like they're expecting them at low-single digits. Can you give us an idea of what you were doing at this time last year and how that trended throughout the quarter?

Thomas L. Millner

No. We don't give quarterly guidance -- I mean, monthly guidance on comps. I will tell you that we had a very large cash card promotion last year in firearms in the month of April that involved a significant discount that we didn't repeat this year.

Ralph W. Castner

I will remind you though for the quarter, in the first quarter a year ago we were up against 8.9%. So the 4.2% growth on top of that is really good. In the second quarter, we were up 4.4% a year ago. Those were -- our 2 best quarters last year were the first 2 quarters.

Jonathon N. Grassi - Longbow Research LLC

Okay. So you said you discontinued the cash card that you had last year but you're still coming up positively, it sounds, against that and would also probably get a tailwind on the merchandise margin?

Thomas L. Millner

Yes.

Ralph W. Castner

Yes.

Jonathon N. Grassi - Longbow Research LLC

Okay. And then can you break out the merchandise margin improvement in Retail versus Direct?

Ralph W. Castner

Yes, I can. It was pretty even between both of them. It was up a little bit higher in Retail than it was in Direct.

Jonathon N. Grassi - Longbow Research LLC

Okay. And then just finally, you said you were at the largest charge-off rates in 3 years. What is the lowest charge-off rate you've seen over the history of WFB?

Ralph W. Castner

We have seen them before get below 2%, but not for a sustainable period of time. I think if you look at -- if you go clear back to '07, I've got the quarterly charge-off date in front of me clear back to '07. In Q1 of '07, we were at 1.88%; and in Q2 of '07, we were at 1.65%. So other than that, they've always been above 2%.

Operator

And we'll go next to Lee Giordano with Imperial Capital.

Lee J. Giordano - Imperial Capital, LLC, Research Division

Can you talk about the initiatives to improve the Women's and Children's business? Just wondering how that's progressing. And what the long-term opportunity do you see for that business?

Thomas L. Millner

Yes. Leadership in our Women's and Children's business has done, with their teams, just a terrific job. I think if you go in our stores, that's the best place just to see it. It's performance gear, good use of color, good use of technology that carries all the way into footwear. The assortment is just flat, better looking than it's been. And we're seeing customers respond to it. In fact, my wife actually dinged our family pocketbook last weekend at our Sidney store in the women's category. And her comment to me was, "Wow, this really looks like great merchandise." And we're hearing that all over the chain. But it's just good execution, a good vision. I think we're very excited about fall goods. We're launching a new line that we're calling OutfitHer, which is camouflage clothing designed for women, by women, to women's fit sizes, instead of asking our female customers to buy smaller sizes that are designed for teenage boys. So we're making a concerted effort in that category. And I think it's going to -- it is paying off for us now. And I think it will continue to.

Operator

And we'll go next to Jim Duffy with Stifel, Nicolaus.

Jim Duffy - Stifel, Nicolaus & Co., Inc., Research Division

I'm so excited about the Denver stores.

Ralph W. Castner

Jim, I figured you'd know exactly where those sites are. They're pretty interesting sites for us.

Jim Duffy - Stifel, Nicolaus & Co., Inc., Research Division

I do. And the traffic patterns makes a big difference that they're in one place versus the other. Yes, so it's easy from some parts of the city to get to one of the locations versus the other.

Thomas L. Millner

Right, which is why we are where we are.

Ralph W. Castner

That's why we had 2.

Jim Duffy - Stifel, Nicolaus & Co., Inc., Research Division

No, it makes sense to me. So a couple of questions. With your data analysis competency, do you have an updated assessment of cannibalization to the Direct business that you're seeing from new stores? Historically, you'd said that it would fall off initially and then come back even stronger. Is that still what you're seeing? Or do you think that increased pace of store expansion is indeed cutting into the Direct business?

Ralph W. Castner

Now I -- well, first of all, what we said was is that you lose 5% to 10% of the Direct business in that market and then it sort of resumes a growth rate that is at historical levels, which I think at the time we made the statement, the entire Direct business was still growing. What we've still seen is a take out in the Direct business of somewhere between $2 million and $4 million in a given market. I think that's still a reasonable number.

Thomas L. Millner

Jim, one other comment I would make. One of the weakest parts of the United States in our Direct business is in the Southeast, where we don't have any stores. And it's going to be interesting as we deploy stores in the Southeast, whether that actually lifts our Direct business in the Southeast, surely because we have more roadside visibility. We've become more top of mind, and we're pretty excited about the potential Direct opportunities in the next 3 years in the Southeast, which is it is the weakest part of the country for us. That and California where we also don't have any stores.

Jim Duffy - Stifel, Nicolaus & Co., Inc., Research Division

Makes sense, I guess. The heightened brand awareness would drive more people to the website.

Thomas L. Millner

Absolutely.

Jim Duffy - Stifel, Nicolaus & Co., Inc., Research Division

Switching gears a bit to the Financial Services business. Ralph, in '07 when charge-offs were in the low, remind me, was that a growth period for the cardholder base?

Ralph W. Castner

It was, yes, because we still we're anniversary-ing a bunch of stores we opened in '06. So it was which is, to my points earlier and you know this, Jim, growth has a short-term favorable impact on charge-offs.

Jim Duffy - Stifel, Nicolaus & Co., Inc., Research Division

Got you. I apologize for the additional questions on provisions here. But I'm just trying to make sure I have my arms around it. So the gross charge-offs were running about 2.4%, net charge-offs at 2%. As we look across the balance of the year, Ralph, can the provisions continue to be down year-to-year in the remaining quarters? Or should it more closely approximate that net charge-off number?

Ralph W. Castner

Well, I said in my comments, we don't expect a significant reduction in the, I want to make sure I'm talking about the same thing, in the balance sheet allowance. So yes, I would expect charge-offs in the provision to be more closely aligned in the last 3 quarters of the year.

Jim Duffy - Stifel, Nicolaus & Co., Inc., Research Division

So you said you don't expect a significant reduction in the provision. Is that from 1Q that you mean or on a year-to-year basis?

Ralph W. Castner

Well, what I -- what I'm -- whatever the -- on the balance sheet, the reserve for future bad debts at the end of the first quarter is, sure I'm reading this right, $67.1 million. I don't expect that number to significantly decrease as we move throughout the year. So what goes through the P&L for charge-offs will be very close to what the provision is.

Jim Duffy - Stifel, Nicolaus & Co., Inc., Research Division

I got you. Okay. And I'm with you. And then back to the merchandise side of the business. ASP drivers there, I assume firearms is helping. Are you seeing a return to growth in some of the higher ticket categories, like boats and ATVs and so forth?

Thomas L. Millner

Yes. We saw a really nice growth in Retail and power sports in the quarter. We launched a new line, Jim, of Coleman-branded ATVs. And consumer reaction was very, very strong. So it's sort of -- it's intuitive that with better weather and every lake and river in the Midwest not 4 miles over their banks that people are getting out and boating and using their ATVs, we've had a good turkey season, first good turkey season in 3 or 4 years. And a lot of ATV uses to that hunting application.

Operator

And we'll go next to Seth Sigman with Credit Suisse.

Seth Sigman - Crédit Suisse AG, Research Division

Can you discuss the progress that you're making and you made over the last couple of quarters in growing your payables relative to your inventory? And is there anything changing with your vendors? Are you seeing more benefits now as you're reaccelerating growth? And how do you think about that going forward?

Ralph W. Castner

Well, a few years, 1 or 2 years ago, we made some significant change in payment terms to really try to manage our cash flow position better. But I would tell you we've largely anniversary-ed those. A lot of that just has to do with better managing inventory and some of the processes were in place. We're still getting some lift from that.

Thomas L. Millner

I think what we want to do in a period of, perhaps, some competitive uncertainty out there, we want to be a place where our vendor base is absolutely comfortable. If they sell us merchandise, they're going to get paid. And that has served us very well over the last 3 years, not just in categories where inventories are tight like ammunition, but across the enterprise.

Seth Sigman - Crédit Suisse AG, Research Division

Okay. And then Tommy, you mentioned before you're making progress driving attachments in the store? Is there any way to quantify maybe some of the attachment rates that you're getting from some of these in-store initiatives and maybe further opportunities to drive that across the store?

Thomas L. Millner

Well, I wouldn't quantify them specifically other than to say I think it's a significant opportunity for us to continue to drive average ticket. And believe me, we're looking at every possible way to do that.

Operator

And we'll go next to Mark Smith with Feltl and Company.

Mark E. Smith - Feltl and Company, Inc., Research Division

Just a couple of quick ones, and sorry if I missed this. Can you just comment on your online mix in the Direct versus catalogs and kind of any change that we saw here that -- this quarter?

Thomas L. Millner

Mix of product or mix by channel?

Mark E. Smith - Feltl and Company, Inc., Research Division

I guess, sales mix of online versus catalog.

Ralph W. Castner

Well, Mark, I'll -- I mean, the trend is unchanged, which is online continues to grow. I will also tell you as what you might call the call center a catalog business gets smaller, I mean those lines start to really blur between what in it. And I know this will sound strange to you, but what's an Internet order and what's a call center order? But as a general trend, digital is up, call center is down.

Thomas L. Millner

And that's an unchanged trend.

Ralph W. Castner

Yes.

Mark E. Smith - Feltl and Company, Inc., Research Division

Did one seem to get impacted more from discounting by peers than other this quarter?

Ralph W. Castner

Well, I mean, the calls -- the historic, whatever you call them, catalog/call center customer is a better customer that's less price-sensitive.

Mark E. Smith - Feltl and Company, Inc., Research Division

That's fair. And secondly, just looking at kind of the buildout schedule going forward here through the remainder of 2012. Can you give any more insight on kind of timing of openings and if stores are on schedule at this point?

Thomas L. Millner

Yes, absolutely. Here's what it looks like. We opened Wichita in March, Tulalip in April, Saskatoon in May, I think it's actually May 10, and it's absolutely on track. Rogers, Arkansas and Charleston, West Virginia in August, on schedule, on track. And then we opened Yakima Union Gap, which is our first Outpost store. And the team told us the other day, we're 163 days from opening. It might be 162 by now. And it opens in October and we're on track and on schedule there. Then as we go into 2013, we have the relocation of our Winnipeg store in Manitoba moving to a 25,000 square foot larger store. And then we will open Columbus, Ohio, Grandview which is Grand Rapids, Michigan and Louisville, Kentucky in the spring. And they're on track. And then we hope to have another store in 2013, plus the 2 Denver stores in the fall of '13. So right now, everything is on track.

Operator

And we'll go next to Stan Westhoff [ph] with [indiscernible] and Company.

Unknown Analyst

I just wanted to follow up on the Financial Services segment. If I understand it correctly, about half of the improvement in operating income was from the marketing fee reduction, as well as a release in the loan allowance, is that correct?

Ralph W. Castner

Well, actually the first part of your statement is right. About half of the improvement is related -- by the way, assuming we're talking about year-over-year improvement in the first quarter, about half of the improvement -- let's say the improvement was, call it, $15 million from $14 million to $25 million. $7.7 million of that is due to lower marketing fees paid to the Merchandising business. Now actually the reserve release had no impact -- or very little impact. It was actually a little bit of a drag because in the first quarter a year ago, that was $8.1 million and it fell then $6.3 million. So the reserve release had very little to do with the year-over-year change in the profitability of either the Financial Services business or the company as a whole. And in fact, it was a little bit of a drag.

Unknown Analyst

Okay. So what made up the other half then?

Ralph W. Castner

With just continued improvements and -- I mean, things we've been talking about for quarters which is improvements in the charge-offs and lower borrowing costs.

Unknown Analyst

Okay. Speaking of Chris late last year and he was mentioning that you kind of run the business on like a return on asset basis and like anything else was just kind of gets flowed back into the Merchandising business?

Thomas L. Millner

Well, that's true except we're starting the first of this year we converted that and those marketing fees are just a fixed, I believe, 70 basis points on charge volume. So you'll start to see more volume -- effective the first of '12, you'll start to see more volatility in that business so...

Operator

That concludes today's question-and-answer session. At this time, I will turn the conference back to Mr. Chris Gay for any additional or closing remarks.

Thomas L. Millner

It's Tommy. I'll actually close this out today. Just one note before we leave. Our Annual Meeting is on June 6, here in Sidney. We would hope that a number of you would come. We've planned quite a big event. We have a lot of vendor participation and a lot of exciting events, and we would hope you would come and hear our recap of 2011 and our future vision for the company. And with that, we thank you for joining us today, and we look forward to talking to you again soon. Thanks.

Operator

That does conclude today's conference. We appreciate your participation.

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